LARRY OVERLAN: Today’s dinosaurs may be the economists who still believe all ships rise with free trade

Saturday

Mar 28, 2009 at 12:01 AMMar 28, 2009 at 2:22 AM

“Punctuated Equilibrium” is how MIT economist Lester Thurow described the state of the global economy in 1996. The former dean of the Sloan School of Management was speaking to the National Press Club in Washington, D.C., about his new book, “The Future of Capitalism.” I saw the speech on TV, ordered a video of it and have played it for my business students ever since. It gets better every semester.

He used the term “punctuated equilibrium” in the economic sense as a metaphor for the evolutionary biology term meaning a sudden change in the order of things, such as when, millions of years ago, at roughly the same time, the dinosaurs became extinct and mammals came into being due to sudden climate change. It was a time of optimism and pessimism simultaneously, depending on which creature you were.

Thurow believed, and many have since realized, that several events had recently occurred that would change the world forever by punctuating the post-World War II equilibrium. The collapse of the Soviet Union in 1991, along with the profound transportation, technological and communications revolutions, had created a global economy for the first time in world history. Goods could now be made anywhere and sold everywhere.

Humans could now watch TV and see higher living standards, and they could move to places that had those better conditions. Unprecedented and massive amounts of goods and peoples were moving across the globe.

In 1996, the economy was great by today’s standards, but shortly before Thurow’s speech, Pat Buchanan had won the New Hampshire Republican Party primary over U.S. Sen. Bob Dole, on a platform denouncing the declining wages of most Americans and promising to put “America first.”

Thurow addressed the issue by wondering why it took so long for a politician to use these economic facts, since they had been true and known for the past 25 years.

In fact, the result of lower wages was to be expected in a global economy because of what economists call “factor price equalization.”

When good-paying U.S. jobs are sent offshore in order to lower labor costs, and millions of legal and illegal immigrants take jobs in the U.S., wages go down, Thurow explained. It was true then, and it has continued. Most increases in income have been captured by the upper 20 percent over the past 30 years, and even that level of earners is not doing too well these days.

Then, in September 2004, one of America’s most famous economists, Paul Samuelson, commented in a New York Times interview on mainstream economists’ assertion that “some people will gain and others will suffer in the short term,” but they quickly add that “the gains of the American winners are big enough to more than compensate for the losers.”

That assumption, so widely shared by economists, is “only an innuendo,” Samuelson said. “It is dead wrong about the necessary surplus of winnings over losings.”

In other words, trade may not always work to the advantage of the majority of Americans.

Analysts in the media today, almost without exception, condemn any retreat from globalization through protectionist measures such as adding “buy American” to the recently passed stimulus bill.

As a result, American taxpayer dollars will be spent on imported goods. Meanwhile, serious unrest has begun in countries around the world as unemployment rises, particularly in countries where former farmers are now factory workers living in cities that didn’t exist 30 years ago. Americans, who consumed almost 25 percent of all the goods produced globally, are refusing to buy almost anything, causing economic chaos around the globe.

For better or worse, global equilibrium has certainly been punctuated.

Thurow didn’t know or predict where all this would lead, but he knew there would be good news and bad news simultaneously.

More recently, Samuelson has challenged the inevitability of the “all ships rise with free trade” theory.

The big difference metaphorically between the dinosaurs and the mammals was the inability of the dinosaurs to adapt to change.

Could the real dinosaurs of today be the mainstream economists who are watching the world spin into chaos while they cling to a theory that only lived in textbooks for 200 years?

Larry Overlan teaches international business at Stonehill College in Easton and lives in Canton. He can be reached at loverlan@stonehill.edu or at 781-821-5939

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